With a foundation of over 1.3 billion people, China now stands as the world’s second largest economy. It holds the globe’s largest foreign currency reserves of over US$3 trillion and is the world’s largest exporter in dollar terms, totalling over US$1.5 trillion.
Alongside this phenomenal growth, the Chinese currency the renminbi (RMB) has seen rapid and extensive development. The RMB is already showing signs of a becoming a major international trade currency, and by the end of 2011 cross-border RMB trade settlement hit RMB2.58 trillion, accounting for about 10% of China’s total trade. The international business community is also expressing strong interest in RMB, with the UK government for example stating its intention for London to become an offshore RMB trading centre; a move it hopes will be of mutual benefit to both the UK and China.
So What Does the Rise of the RMB Mean for Businesses?
The RMB was previously a restricted currency, meaning it could not be taken out of China. This required businesses to change RMB back into US dollars or euros in order to hold funds outside of China. This added both another layer of administration and potential additional costs. By internationalising the currency, a process which was started by the Chinese government in July 2009, cross-border transactions were permitted for a variety of current and capital account purposes. This meant that the RMB was allowed to be held offshore, enabling businesses to further diversify their currency holdings and spread risk accordingly. The deregulation of the currency means a natural currency hedge will also be achieved for businesses that have existing receivables or payables already in RMB.
Increasingly, Chinese businesses themselves are looking to use the RMB in their trade with foreign companies. HSBC research undertaken in 2011 found that 29% of companies in China’s top four cities (Shanghai, Beijing, Guangzhou and Shenzhen) plan to adopt RMB in the next 12 months, whilein the longer term nearly eight out of 10 Chinese businesses not already trading in RMB plan to do so in the future. Motivations for the increased use of the RMB include a desire from Chinese-based businesses to hedge foreign exchange (FX) fluctuation risk (given as their top priority by 49% of the businesses surveyed), followed by positive opinion around the RMB’s long-term appreciation (44%).
This increased interest in the RMB among Chinese businesses has implications for their international trading partners. Just as those businesses that do not have the capability to transact in the currency may lose out if potential Chinese partners prioritise trading with RMB-compatible businesses, those who have RMB capabilities may find they can negotiate improved trading terms with Chinese suppliers and purchasers.
So for businesses at the starting blocks of RMB trading, what steps should they be taking next? First, businesses should consider who they currently trade with, or hope to trade with in the near future, to see if it is worthwhile getting ready to trade in RMB.
If the business case to trade in RMB is strong, then organisations need to check that their internal accounting systems can cope with trading in the currency. For example, do current business systems have the capability to invoice in RMB and accurately monitor receivables? It is often these basic first steps to become RMB ready that are overlooked, despite their importance in helping businesses to maintain accurate invoicing and a healthy cash flow when trading in a new currency.
Businesses must give due consideration to managing any additional FX risk that holding another currency in their portfolio will bring. They will also need to check they have the appropriate banking support in place, not only to handle RMB transactions, but to provide consultancy and advice where necessary. The pace at which RMB development will continue to unfold is as yet known, and as such a bank with expertise in the currency can help businesses monitor and adapt to on-going changes and regulations.
China’s rapid growth and internationalisation of the RMB presents significant growth and trade opportunities for businesses. It’s important that organisations, if they haven’t already, look at their current operations and evaluate how they can be part of this Asian growth story.
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